Income Tax Appellate Tribunal - Delhi
Nokia Corporation vs Assistant Director Of Income Tax on 29 May, 2007
Equivalent citations: (2007)112TTJ(DELHI)627
ORDER
R.C. Sharma, A.M.
1. Both the appeals filed by the assessee against the orders of CIT(A) dt. 30th Dec., 2005 for the asst. yrs. 1997-98 and 1998-99, in the matter of orders passed under Sections 154/254/143(3) and 250 of the IT Act, 1961 wherein Mowing grounds of appeal have been raised:
Grounds in ITA No. 463/Del/2006:
1. The learned CIT(A)-XXIX ('CIT(A)') on facts of the case and in law, erred in upholding assumption of jurisdiction under Section 154 of the IT Act, 1961 ('Act') by the learned AO.
2. The CIT(A) erred on facts and in law, in upholding inclusion of Rs. 5 crores as income from vendor financing in the order passed under Section 154 of the Act, in respect of appeal effect order dt. 28th July, 2005.
3. Based on facts and circumstances of the case and in law, the order passed by CIT(A) under Section 154 of the Act is bad in law and void ab initio.
4. The CIT(A) erred on facts and in law, in not directing the AO to adjust the sum of Rs. 3 crores (deposited by the appellant on 5th Sept., 2003 through a common challan issued by the AO for asst. yrs. 1997-98 and 1998-99) against the demand pending in the subject assessment year.
Grounds in TTA No. 464/Del/2006:
1. The learned CIT(A)-XXIX ('CIT(A') has erred on facts of the case and in law, in upholding assumption of jurisdiction under Section 154 of the IT Act, 1961 ('Act') by the learned AO.
2. The CIT(A) erred on facts and in law, in upholding inclusion of Rs. 5 crores as income from vendor financing under Section 154 of the Act, in respect of appeal effect order dt. 28th July, 2005.
3. Based on facts and circumstances of the case and in law, the order passed by CTT(A) under Section 154 of the Act is bad in law and void ab initio.
4. The CIT(A) erred on facts and in law, in not directing the AO to adjust the sum of Rs. 3 crores (deposited by the appellant on 5th Sept., 2003 through a common challan issued by the AO for asst. yrs. 1997-98 and 1998-99) against the demand pending for the preceding assessment year i.e. asst. yr. 1997-98.
2. Rival contentions have been heard and record perused. Facts in brief are that M/s Nokia Corporation (formerly known as Nokia Networks OY) is a company incorporated in Finland, involved in carrying on business of sale and licensing of telecommunication equipment and software. It has entered into contract with various companies in India for supply of hardware and software. It had opened an office, described as liaison office in India. Assessee company known as Nokia (P) Ltd. was incorporated in India on 23rd May, 1995. This company is 100 per cent subsidiary company of Nokia Corporation, Japan. During the course of scrutiny assessment Under Section 143(3), the AO found that the assessee company has provided credit facilities to the Indian operators on which interest @ 18 per cent per annum was chargeable under the agreement. Accordingly, the AO made an addition of Rs. 5 crores as interest on outstanding payments and vendor financing. In an appeal filed before the learned CIT(A), he confirmed the action of the AO by observing that there was a defect in the books at least to the extent, that interest chargeable from the Indian operators was not provided in the books. By following the decision of Hon'ble Supreme Court in the case of State Bank of Travancore v. CIT , the learned CIT(A) held that interest should have been provided in the books, in the absence thereof, the correction was required to be made in the books. However, the learned CIT(A) classified this income as commercial income and added to the income from sale of equipment and licensing of software, and held that this income was liable to be charged to tax @ 55 per cent.
3. Aggrieved by the above order of the learned CIT(A), following relevant grounds were raised by the assessee with regard to interest income added, in an appeal filed before the Tribunal:
Based on facts and circumstances of the case and in law, the learned CIT(A) has erred:
(a) in upholding the AO's contention that the appellant earned interest income on account of vendor financing and delayed payments from Indian telecom operators;
(b) in upholding the AO's contention that interest income allegedly earned on account of vendor financing and delayed payments is taxable in India;
(c) in, without prejudice, not concluding on allowability of expenses incurred in earning interest income, while taxing such income as 'commercial income' under Article 7 of the Agreement for Avoidance of Double Taxation between India and Finland [No. GSR 786(E)];
(d) in, without prejudice, not concluding on application of 'attribution principle' while taxing interest income as 'commercial income' under Article 7 of the Agreement for Avoidance of Double Taxation between India and Finland [No. GSR 786(E)];
(e) in, without prejudice, applying a tax rate of 55 per cent on interest income from vendor financing and delayed payments.
4. Vide its order dt. 22nd June, 2005, the Tribunal confirmed the action of the learned CIT(A) with respect to these grounds, after having the following observations:
We have considered the facts and the rival contentions but we find no substance in the assessee's case. The findings of the CIT(A) have not been rebutted before us on the basis of any material or evidence. The existence of the clause in the agreement for charging interest @ 18 per cent per annum is not denied. All that is contended is that the clause was not activated but this contention is without substance because if the agreement is in force then it is in force with all its clauses which includes the charging of interest. It was for the assessee to show on the basis of any evidence or correspondence or subsequent agreement modifying the earlier agreement under which interest was chargeable. This has not been done. The mere fact that no credit was taken in the account books for the interest cannot stop the accrual thereof as, the assessee's income. Even before us no evidence was filed to show that the financial position of the cell operators was bad and that there was an agreement between the parties not to charge interest or not to activate the clause providing for interest. In these circumstances, we uphold the addition for both the years.
5. However, in addition to ground of interest income on vendor financing and delayed payment, many more grounds raised by the assessee before the Tribunal were decided vide order dt. 22nd June, 2005. The assessee filed a petition dt. 15th July, 2005 before the AO for giving appeal effect to the order of the Tribunal dt. 22nd June, 2005. It was pointed out in the application that interest income from vendor financing can be taxed in India only to the extent the same is attributable to the PE. As per the steps of attribution laid down by the Tribunal, it was submitted in the application, that the same although held as taxable is not attributable to the income of the alleged PE. An appeal effect order dt. 28th July, 2005 was passed by the AO in accordance with the draft computation submitted by the assessee. Subsequently, a notice dt. 22nd Aug., 2005 was issued by the AO to rectify the relief of Rs. 5 crores given under the head "vendor financing income". It was held in the order passed under Section 154 that:
The Tribunal has clearly endorsed the view of the AO as well as CIT(A) on the addition of interest on vendor financing and has upheld the addition in both the years. The issue of attribution has only been dealt with by Hon'ble Tribunal insofar as the matter pertains to the sale of equipment. As far as taxation of interest on vendor financing is concerned, Hon'ble Tribunal has upheld the decision of the AO in toto. Therefore, there is no ambiguity inasmuch as the mandate of Hon'ble Tribunal is concerned. In view of the above, I fail to persuade myself with the arguments and contentions of the assessee. Therefore, the arguments and contentions of the assessee are rejected. Therefore, from the foregoing it is clear that the mistake is apparent from record and the same is rectified under Section 154 of the IT Act, 1961.
6. By the impugned order, the CIT(A) confirmed the action of the AO. Aggrieved by the above order of the CIT(A), the assessee is in appeal before us. It was vehemently argued by the learned senior counsel that Hon'ble Tribunal in its order dt. 22nd June, 2005, reported in Motorola Inc. v. Dy. CIT (2005) 96 TTJ (Del) (SB) 1 : (2005) 95 ITD 269 (Del) (SB) was pleased to hold that sale of hardware took place outside India and therefore, no income accrued to the assessee in India on the sale thereof. But since assessee's subsidiary Nokia India (P) Ltd. constituted a PE Hon'ble Tribunal held that only following activities of the assessee were carried on in India through the PE for which attribution is called for:
(a) Network planning.
(b) Negotiations in connection with sale of equipment.
(c) The signing of the supply and installation contracts.
7. It was further contended that the fact that interest income forms an integral part of sale of equipment has become final and is no more in dispute. Since admittedly the income from sale of equipment is not liable to tax in India, interest on vendor financing, which as commercial income is a part thereof, cannot be separately taxed. To tax under the AADT it is either to be attributable to a PE under Article 7 or to the sale which takes place in India. Interest for delayed payment of sale consideration cannot be taxed unless it can be so under the AADT. Thus, in order to be taxed it is attributable to PE or is a part of sale. For attribution it is accepted by all it is not includible. And as sale is not taxable, no part of it is taxable. The interest has no separate legs to stand as it does not fall within Article 12 but is commercial profit, as held by CIT(A). It falls for taxation or out of it, with the income from sale of equipment reference CLT v. Govinda Choudhary & Sons , CIT v. B.N. Aggarwal & Co. , Nirma Industries Ltd. v. Dy. CIT . The issue remains alive only in the restricted sense that if in an appeal by the Department the Hon'ble High Court is pleased to accept that sale of equipment is liable to tax in India, then the vendor financing will be added thereto.
8. With regard to the scope of Section 154, the learned senior counsel contended that issue of taxability of vendor financing income was elaborately discussed by the assessee and was accepted by the AO while giving appeal effect that vendor financing is a part and parcel of income from sale of equipment. As per the learned Authorised Representative, the order was passed by the AO after due application of mind. In terms of Clause (e) of Section 114 of the Indian Evidence Act, a presumption can be raised that such an order has been passed on application of mind and that judicial and official acts have been regularly performed. The power under Section 154 is undoubtedly a limited power, and it is not a power of revision or review, but is limited to correcting only those mistakes which are apparent from the record. He relied on the decision of jurisdictional High Court in the case of CIT v. Honda Siel Power Products Ltd. (2006) 206 CTR (Del) 328 : (2007) 158 Taxman 56 (Del), and contended that the issue of rectification proceedings being bad in law. Without prejudice to the legal submission, he further submitted that if interest on vendor financing can be taxed only as attributable to PE, in the first place, it cannot be included as it is not a part of contract price, and it will only go on to inflate the contractual receipts and thereafter it will be taxable in proportion of GP rate and 20 per cent attribution will apply as held by the Tribunal Special Bench reported at (2005) 96 TTJ (Del) (SB) 1 : (2005) 95ITD 269 (Del) (SB)(supra).
9. On the other hand, learned Departmental Representative contended that once the decision has been rendered by the Tribunal, the assessee cannot contest the additions and findings of the Tribunal, during the course of giving appeal effect by the AO. With reference to the learned Authorised Representative's contention that findings recorded by the learned CIT(A) regarding nature of interest income and its taxability, to the effect that interest income was commercial income of the assessee and not income from advances of cash loans, has not been challenged by the Department before the Tribunal and the same has become final, therefore such income is liable to be taxed only on the basis of formula of attribution provided by the Tribunal, the learned Departmental Representative replied that once the decision has been rendered by the Tribunal on the grounds of appeal raised against the order of learned CIT(A), the assessee cannot contest the additions and the findings of the CIT(A)'s order, at this stage which has been upheld by the Tribunal. He also drew our attention to the grounds of appeal raised before the Hon'ble Delhi High Court against the order of the Tribunal, in which the assessee has contested the findings of the Special Bench on the addition of Rs. 5 crores on, account of interest income from vendor financing.
10. We have considered the rival contentions, carefully gone through the orders of the authorities below and also deliberated on the case law cited by the learned Authorised Representative and learned Departmental Representative during the course of hearing before us. From the record, we find that an addition of Rs. 5 crores was made by the AO on account of interest chargeable @ 18 per cent on the credit facilities provided to the Indian cell operators. This addition was upheld by the learned CIT(A) both with regard to the quantum of addition as well as rate of tax to be charged at 55 per cent on such interest income. However, while disposing this ground of appeal, the learned CIT(A) has also made an observation to the effect that interest income was the commercial income of the assessee, arising from sale of equipment and licensing of software, and not interest income on advances of cash loans. He, therefore, directed for addition to the income from sale of equipment and licensing of software @ 55 per cent. Aggrieved by the order of the learned CIT(A), in ground No. 3 raised before the Tribunal, the assessee has challenged the action of the learned CIT(A) in upholding the action of the AO that the assessee earned interest income on account of vendor financing and delayed payment from Indian telecom operators. Action of the learned CIT(A) to the effect that interest income earned on account of vendor financing and delayed payment was taxable in India, was also challenged. The assessee has also challenged the action of the learned CIT(A) for not concluding on application of "attribution principle" while taxing interest income as "commercial income" under Article 7 of the Agreement for Avoidance of Double Taxation between India and Finland. The rate of tax applied at 55 per cent by the learned CIT(A), was also challenged. Hon'ble Tribunal at para 283 of its order, after considering all the contentions of the assessee and orders of the lower authorities, reached to the conclusion that existence of clause in the agreement for charging interest at 18 per cent per annum was not denied. The Tribunal further found that all that was contended was that the clause was not activated, but this contention was -found to be without substance on the plea that agreement was in force with all its clauses which also included the clause of charging of interest. The Tribunal, further found that it was for the assessee to show on the basis of evidence or correspondence or even by subsequent modification in the agreement under which interest was chargeable, but the same has not been shown/done. As per Tribunal, the mere fact that no credit was taken in the account books for the interest, cannot stop the accrual thereof as the assessee's income. A further finding was recorded by the Tribunal that no evidence was filed even before the Bench to show that the financial position of the cell operators was bad and that there was an agreement between the parties not to charge interest or not to activate the clause providing for interest. After having all these observations, the Tribunal upheld the addition for both the years. From the record, we also found that as per the grounds of appeal taken by the assessee before the Hon'ble High Court, against the order of the Tribunal the action of the Tribunal was alleged to be perverse in the sense that it having held that profit from sale of equipment is not liable to tax in India, interest on vendor financing without prejudice which is an integral part thereof is liable as such in principle. There is no iota of any doubt from the order of the Tribunal that the action of the lower authority with regard to the addition in each year on account of interest on vendor financing, was confirmed. There is no direction for deletion of such interest income in para 287 of Tribunal order, as submitted by learned Authorised Representative. Even though before the Tribunal the assessee has alleged the action of CIT(A) for not concluding on the attribution principle while taxing the interest income as commercial income, but nowhere in para 287 the Tribunal has given any verdict for taxability of interest income on the basis of attribution principle. This was the reason that this action of the Tribunal was alleged by the assessee before the High Court. We are, therefore, not persuaded to agree with the contention of learned Authorised Representative that even though action of lower authorities regarding interest addition, was confirmed by the Tribunal in para 283 but for purpose of attribution, it was again excluded in para 287 of its order.
11. While giving effect to the order of the Tribunal, the AO is supposed to obey each and every direction/order passed by the Tribunal. He is not empowered to interpret the order of the Tribunal in his own way he likes nor he is empowered to apply his discretionary power for adding or deleting any additions, which have been specifically ordered by the Tribunal. Notwithstanding any observation of the learned CIT(A) regarding nature of the interest income as commercial income, instead of interest income per se, the Hon'ble Tribunal has confirmed the addition in both the years on account of interest on outstanding payments and vendor financing. There is also no direction in para 287 of the order for taxing such interest income in proportion of GP and 20 per cent attribution principle. While giving effect to such order of the Tribunal, if the AO deletes the addition so confirmed by the Tribunal, will amount to a mistake apparent from record which can be rectified by invoking the provisions of Section 154. We therefore do not find any infirmity in the orders of lower authorities for rectifying the apparent mistake committed by AO while passing appeal effect order.
12. In the result, both the appeals of the assessee are dismissed.